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LMA standard terms and the Unfair Contracts Terms Act

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Summary: A facility agreement based on LMA terms was held not to be on the Lenders’ standard terms within the meaning of the Unfair Contract Terms Act 1977.

African Export-Import Bank v Shebah Exploration & Production Co Ltd [2016] EWHC 311 (Comm) (19 February 2016)

Background

On 1 July 2011, African Export-Import Bank, Diamond Bank PLC and Skye Bank PLC (the ‘Lenders’) agreed to lend $100m to Shebah Exploration & Production Company Limited (‘Shebah’). On 11 May 2012, the loan was amended and restated and the amount lent was increased to $150m. The facility agreement (the ‘Agreement’) was based on the form of syndicated facility agreement published by the Loan Market Association (the ‘LMA’). The Agreement was negotiated by Shebah and the Lenders’ solicitors. Most of the proposed changes were rejected by the Lenders’ solicitors. However, the material adverse change clause, the requirement for the Lenders’ engineer to certify certain oil reserves and the Projects Account clause were all changed.

Shebah defaulted on the loan after only one repayment instalment of around $6.1m. The Lenders accelerated the loan and when Shebah failed to pay sought summary judgment to recover the outstanding amount. Shebah made various counterclaims and argued that they were entitled to a set-off against all of the outstanding amount.

Clause 32.6 of the Agreement prevented an Obligor claiming set-off or counter-claim against any payment. However, Shebah argued that they were contracting on the Lenders’ written standard terms of business engaging section 3 of the Unfair Contract Terms Act 1977 (‘UCTA’), which would mean that Clause 32.6 would be subject to the test of reasonableness under section 11 of UCTA.

Decision

Phillips J, sitting in the High Court, began by looking at the definition of ‘written standard terms of business’, which he found was not defined in UCTA. However, Shebah had accepted that they would have to establish that the Lenders had habitually entered into syndicated loans on the basis of the LMA form and that in all cases they had refused to negotiate so that those terms were effectively untouched when each contract was entered into.

The judge held that:

  1. there was simply no basis for inferring that the Lenders, or any of them, habitually put forward the LMA form as a basis for their syndicated loan transactions; 
  2. there was even less basis for inferring that the Lenders always refused to negotiate the terms it contained; and 
  3. in any event, the evidence failed to demonstrate that the Lenders refused to negotiate in the present case, or that the version of the LMA form they put forward remained 'effectively untouched'.

He went on to add that ‘in circumstances where commercial parties, represented by solicitors, have utilised a “neutral” industry model form as the basis for a complex and detailed financial contract, executed after the usual process of negotiation, including revising a travelling draft, it will require cogent evidence to raise even an arguable case that the resulting contract is made on the written standard terms of one of those parties.’ Accordingly, the Lenders’ application for summary judgment succeeded.

BLP Comment:

Although Phillips J makes it clear that it would be extremely unlikely that a syndicated facility agreement based on the LMA templates would be written standard terms of business for the purposes of section 3 of UCTA, he did not rule out the possibility. It is also possible for a contract to be on standard terms even though some amendments are made during the negotiations; it all depends on the facts.

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